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The economic news was mostly quite good this past week. But earnings and revenues reports were mixed with the worst news coming out the last trading day, raining on the Dow’s parade, which marched past 10,000 and then back below.
 Even though it was a good week net for economic indicators, company news kept equity gains modest for the week. Trading was mixed on week open as many took the Columbus Day holiday off. Equities were generally down slightly on Tuesday as a downgrade to Goldman Sachs weighed on financials and health care was bumped down by debate on health care reform. Weak earnings by Johnson & Johnson also kept equities soft.
The big positives were heading into and on Wednesday. Intel beat estimates after Tuesday’s close and JP Morgan Chase trampled earnings forecasts prior to Wednesday’s open. The firm’s investment banking business earnings far outweighed loan losses. Financials generally posted notable gains for the day. Adding to a big boost in equities at mid-week was a sharply higher than expected gain in core retail sales, especially helping retail stocks. The Dow closed over 10,000 for the first time in a year.
A jump in the Empire State manufacturing index and a dip in initial jobless claims should have lifted stocks sharply on Thursday but a below expectations Philly Fed report was partially offsetting. But what kept stock gains modest for the day was an announcement of huge losses by Citigroup. However, the energy sector did advance on higher oil prices.
Equities were handed a setback on Friday despite a much stronger than expected jump in industrial production. Both GE and Bank of America announced disappointing results. What stood out was Bank of America’s $2.2 billion third-quarter loss as consumer credit problems continued. This raised concern about banks that did not have investment divisions large enough to offset losses from more traditional sources of revenues. It also reminded markets that the health of the consumer sector is still suspect.
It was still a net positive for most equity indexes but disappointing earnings and even more disappointing revenue took quite a bit of the luster off the week—including knocking the Dow back below 10,000.
Major equity indexes were up this past week. The Dow was up 1.3 percent; the S&P 500, up 1.5 percent; the Nasdaq, up 0.8 percent; and the Russell 2000, up 0.2 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 13.9 percent; the S&P 500, up 20.4 percent; the Nasdaq, up 36.8 percent; and the Russell 2000, up 23.4 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were little changed net this past week despite some moderate daily swings in rates. Treasury pits were closed on Monday for the Columbus Day holiday. A weak dollar boosted prices the first day of trading as the cheaper currency was seen as making Treasuries more attractive overseas. Prices fell and Treasury yields jumped at mid-week on unexpectedly strong core retail sales released by the Commerce Department and on an upgrade by the Fed to its economic forecast. Also, funds moved out of Treasuries and into stocks on Wednesday and Thursday as equity indexes were strong. Friday’s disappointing earnings results led to flight to safety, bumping yields down despite an announcement by the Treasury of the largest annual federal deficit since 1945. Foreign demand also helped to keep rates little changed for the week.
 For this past week Treasury rates slightly changed as follows: 3-month T-bill, flat; the 2-year note, down 1 basis point; the 5-year note, flat; the 7-year note, up 1 basis point; the 10-year bond, up 2 basis points; and the 30-year bond, up 2 basis points.
The yield curve remains moderately steeped but low due to the Fed’s continued loose monetary policy with the fed funds target range of zero to 0.25 percent keeping short-term rates very low. The Fed has announced that it expects to keep the target low for some time and traders have taken this to be credible.
 Crude oil prices marched higher this past week, hitting levels not seen in a year. The week’s gains started with a notable rise on Monday, largely on optimism about the recovery as there was no economic indicator news in the U.S. on the Columbus Day holiday. But this optimism was topped later in the week as spot prices for West Texas Intermediate settled over $75 per barrel on Wednesday. Strong core retail sales boosted crude prices as did a report that China’s crude oil imports were up sharply. Thursday saw a spike in crude prices as the Columbus Day delayed weekly inventory report showed gasoline inventories down sharply, indicating strong demand.
Net for the week, spot prices for West Texas Intermediate jumped $6.11 per barrel to settle at $77.88. This is the highest settle since $78.63 on October 14, 2008.
Economic data was mostly positive this past week—with manufacturing clearly standing out. The consumer sector, however, was mixed.
 The consumer sector is turning out to be somewhat stronger than expected, according to September retail sales. Yes, the headline number fell sharply, but the latest report clearly was a reminder lesson that you can’t just rely on the headline for trading or investing. The consumer pulled back sharply in September—but it was mostly due to the post-“clunkers” drop in auto sales. Overall retail sales in September dropped 1.5 percent after a 2.2 percent spike the month before. The decline was led by a 10.4 percent plunge in auto sales after a 7.8 percent boost in August. But outside of autos, sales were mostly healthy. Excluding motor vehicles, retail sales advanced 0.5 percent, following a 1.0 percent jump in August.
Checking on the other volatile component, gasoline sales provided lift, gaining 1.1 percent in the latest month. Nonetheless, excluding motor vehicles and gasoline, retail sales rose 0.4 percent, following a 0.6 percent gain the previous month. Although core components were mixed, they were mostly positive and reflected sizeable gains. We now have had two months of unexpectedly healthy core sales. Apparently, the consumers that have jobs are a little more optimistic and are willing to spend.
More components are starting to turn positive on a year-ago basis even though over numbers are still negative. Overall retail sales on a year-ago basis in September improved marginally to down 5.7 percent, from down 5.8 percent in August. Excluding motor vehicles, the year-on-year rate increased to minus 4.9 percent in September from down 6.3 percent the previous month. But health & personal care, sporting goods, and food & beverages are now in the plus category for the latest 12-month change and others are growing less negative.
 Although retail sales have been running ahead of expectations in recent months, the consumer mood about the economy is not improving and even has reversed course. The Reuters/University of Michigan consumer sentiment index for mid-October fell back more than 4 points to 69.4. Weakness was concentrated in the expectations index component which fell nearly 6 points to 67.6. The current conditions index dipped almost 1-1/2 points to 72.1. Rebounds in the housing and manufacturing sectors, as well as strength in the stock market, are likely holding up current conditions with continuing job losses likely hurting confidence in the outlook. On the positive side, consumer spirits are still much improved from July and August’s depressed levels and especially from latter 2008.
 One of the strongest sectors in the economy is turning out to be manufacturing. And the particularly good news is that gains have seen across a number of industries—not just autos. Overall industrial production in September posted a 0.7 percent gain, following a 1.2 percent jump the month before. For the latest month, the manufacturing component continued a recent, healthy uptrend, rising 0.9 percent after a 1.2 percent boost in August. For September, utilities fell 0.7 percent while mining output increased 0.7 percent.
 As expected, the “cash-for-clunkers” program continued to boost the auto industry. Motor vehicles and parts output gained 8.1 percent for September after rising 6.1 percent the month before. Combined auto and light truck assemblies have risen three months in a row, reaching a 7.2 million unit annualized pace in September after 6.3 million the month before. The recession low was 3.7 million units in January of this year when bankruptcy issues for GM and Chrysler cut sales and production.
Incidentally, the Fed recently ended the latest recession in its shading of its industrial production charts in its official releases. The recession shading ends with June data based on “the trough of a 3 month moving average of manufacturing IP” (industrial production). However, the Fed makes no claim that the recession is officially over—that is the job of the National Bureau of Economic Research.
But for September, strength was widespread outside of autos. Overall production excluding motor vehicles was still up 0.4 percent for September—for manufacturing ex-motor vehicles was up 0.5 percent.
Overall capacity utilization in September rose for the third month in a row, reaching 70.5 percent, compared to 69.9 percent in August (revised from 69.6 percent) and its recent historical low of 68.3 percent in June. September’s figure came in above the market projection for 69.6 percent.
While it is not gangbusters, the manufacturing sector clearly has pulled out of recession bottom with help especially from autos and the boost in sales from “cash-for-clunkers.” But most manufacturing industries even outside the auto sector also are showing moderately healthy gains.
 More recent surveys on the manufacturing sector show this sector continuing to grow in October. However, the New York Fed’s survey shows accelerating growth while the Philly Fed survey shows slightly slower growth. The Empire State general business conditions index jumped to 34.57 in October from 18.88 in the previous month. As a diffusion index, higher positive levels are comparable statistically to faster growth rates. The Empire State headline index has been above breakeven since August and has been steadily rising.
The outlook is just as positive as the new order index has been mirroring the overall index, now at 30.82 and the unfilled orders index is back into positive territory.
The Philly Fed manufacturing index slipped to 11.5 in October from 14.1 the month before. Although still well above breakeven, the latest number reflects a modest slowing in month-to-month growth of manufacturing activity. Looking ahead, activity is likely to improve as the new orders index did accelerate slightly, to 6.2 from 3.3 in September.
 Headline and core CPI inflation headed in opposite directions in September. The headline CPI rate eased to a 0.2 percent gain after jumping 0.4 percent in August. The slowing was due to a dip in food prices and a dramatically slower gain in energy costs. Core CPI inflation firmed slightly, rising 0.2 percent after a 0.1 percent increase in August.
Helping to soften the headline number, the food component declined 0.1 percent after a 0.1 percent rise the month before. The energy component slowed to a 0.6 percent boost in September, following a sharp 4.6 percent jump in August. Gasoline posted a modest 1.0 percent gain in the latest month after a 9.1 percent spike in August.
The moderately faster pace for the core rate was due to relatively strong gains in lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. However, hotel costs picked up after declines earlier in the summer. Likely, there was not a seasonally expected dip in September (after summer vacation rates) because rates had already been cut with discounts due weak demand. The same likely applies to vehicle prices.
 A key point affecting the trend in core inflation is that shelter cost inflation has become anemic. In fact, the rent and owners’ equivalent rent subcomponents posted their first decreases since 1992. Basically, after discounting temporary factors, inflation remains subdued. The weakening in housing costs especially points to a sluggish trend for inflation in the near term unless energy costs pick up.
Year-on-year, headline inflation edged up to minus 1.3 percent (seasonally adjusted) from down 1.4 percent in August. The core rate was unchanged at up 1.5 percent in September. On an unadjusted year-ago basis, the headline number was down 1.3 percent in September while the core was up 1.5 percent.
 The weak dollar has boosted import inflation over the last few months compared to the middle of recession. But import prices still are mostly subdued--for now.
Total import prices rose only 0.1 percent in September, reflecting a 1.1 percent downswing in prices for petroleum products. But with oil prices now back above $75 per barrel, the petroleum reading and headline import price number for October are likely to show upswings.
 Excluding petroleum, import prices firmed to a 0.4 percent boost in September, following a 0.3 percent rise in August. But most of the gain was in industrial supplies excluding petroleum, which jumped 1.5 percent. The foods, feeds & beverages component rose 0.4 percent. But other components that are closer to the CPI and PPI were soft—with capital goods, up 0.1 percent; automotive, up 0.1 percent; and consumer goods excluding automotives, up 0.1 percent.
For now, overall import price inflation is sluggish but still positive. This is a sharp contrast to six months to a year ago when prices were falling. With a weak dollar and rising oil prices, the impact of import inflation is likely to be adverse in coming months. The Fed will be paying close attention in the near future to any further decline in the dollar, oil prices, and the strength of recovery overseas.
In its policy debate during the last FOMC meeting, the Fed upgraded the strength of the recovery somewhat, according to the minutes for the September 22-23 FOMC meeting. Nonetheless, policy is likely to remain loose for some time as the Fed noted that resource utilization (capacity utilization and the unemployment rate) is still soft and inflation is expected to remain tame for some time. However, higher oil prices bumped up their numbers for headline inflation.
"Because of recent increases in energy prices, overall consumer price inflation was projected to be somewhat above core inflation in the second half of 2009 and 2010, but it was expected to be near the core rate in 2011."
At the time of the release of the minutes, a number of financial analysts harped on the fact that the minutes indicated differences in opinion among FOMC participants about the timing of unwinding balance sheet expansion with some wanting an earlier timetable and others believing delay is appropriate. This led many traders to believe that the Fed would stay easier longer due to possible dissension. But an important point is that debate within the Fed is common and it is only natural that the debate expands during turning points in the economy and in Fed policy. Likely, too much was made of the timing debate.
Overall, the Fed minutes provide only modest new news—the slight upgrade in the staff’s economic forecast. The details on the economy are consistent with other economists’ view that the recession is over but that recovery is moderate and still tentative.
Most economic news this past week was quite favorable, indicating that the economy indeed is in recovery. Nonetheless, financial markets will remain uncertain over how economic growth translates into earnings in each of the various sectors. Despite the latest core retails sales coming in healthy, the consumer sector is likely to remain sluggish. Manufacturers appear to have an upgraded outlook.
The only market moving indicator this week is housing starts which are released on Tuesday. But there is additional news on the housing sector with the Friday release of existing home sales. Also, traders will be picking apart Wednesday’s Beige Book for signs of further recovery.
Housing starts in August rose 1.5 percent, to an annualized pace of 0.598 million units. The rebound in August was led by the multifamily component which jumped 25.3 percent after plunging 15.2 percent the month before. However, the single-family component slipped 3.0 percent after rising 3.3 percent in July. Overall, however, starts have risen significantly since recession bottom. Total starts are up 24.8 percent in August from the recession low of 0.479 million units in April of this year. Looking ahead, the upward trend is likely to be choppy given the heavy supply of unsold houses on the market and continued high unemployment.
Housing starts Consensus Forecast for September 09: 0.615 million-unit rate
Range: 0.590 million to 0.630 million-unit rate
The producer price index in August rebounded 1.7 percent after dropping 0.9 percent in July. The jump in the latest month was led by an 8.0 percent surge in energy costs with food price inflation was also strong with a 0.4 percent boost. However, the core rate was considerably tamer, rising 0.2 percent, following a 0.1 percent decline in July. The core rate rebounded largely on a 0.7 percent gain in passenger car prices and a 0.8 percent increase for light trucks. Looking ahead, we likely will see a dip in the headline number in September on lower energy costs as already suggested by the atypically earlier release of the CPI for September. The core finished goods PPI has both consumer and capital equipment components and those are likely to be slightly positive.
PPI Consensus Forecast for September 09: -0.3 percent
Range: -0.8 to +0.2 percent
PPI ex food & energy Consensus Forecast for September 09: +0.1 percent
Range: -0.1 to +0.5 percent
The Beige Book being prepared for the November 3-4 FOMC meeting is released this afternoon.
The Fed’s most recent Beige Book said that economic activity continued to stabilize in July and August. Some Banks even reported "signs of improvement." Markets will be looking for changes in the overall characterization of the economy as well as specifics on key sectors such as housing, the consumer, and credit markets.
Initial jobless claims fell 10,000 in the October 10 week to 514,000. Continuing claims also fell, down 75,000 to a sub-6 million level at 5.992 million in data for the September 26 week.
Jobless Claims Consensus Forecast for 10/17/09: 519,000
Range: 510,000 to 525,000
The Conference Board's index of leading indicators has risen for five consecutive months, including a 0.6 percent gain in August. The recession is almost certainly over but there is still debate over which month was the end. The coincident index was unchanged in August after a 0.1 percent rise in July. The National Bureau of Economic Research (which officially dates the peaks and troughs of U.S. business cycles) heavily relies on the coincident index to peg recessions.
Leading indicators Consensus Forecast for September 09: +0.9 percent
Range: +0.3 to +1.0 percent
Existing home sales in August ended four months of gains, declining 2.7 percent to a 5.10 million annual rate. The dip was split between single family homes, down 2.8 percent, and condos, down 1.6 percent. However, the supply news was a big plus in the report, with supply dropping to 8.5 months—a 2-1/2 year low and compared to July at 9.3 months. But September could return to the plus category as potential homebuyers have a looming deadline of November 30 to close a sale to qualify for first-time homebuyer tax credits.
Existing home sales Consensus Forecast for September 09: 5.35 million-unit rate
Range: 5.21 to 5.50 million-unit rate
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
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